Complying with the terms of binding contracts is a critical obligation for any payment company or financial institution, and one that has been particularly onerous under manual systems and processes.
The time-consuming compliance burden is compounded by the fact that financial institutions are complex organizations made up of a number of different departments with practices that are not necessarily standardized or coordinated.
This has made ensuring compliance across an entire organization a significant challenge that traditional systems struggle to adequately handle. These traditional approaches are not only time-consuming, inefficient, and prone to human error, but they also expose financial institutions to unacceptable levels of legal and reputational risk.
Legal technology solutions, enabled by artificial intelligence (AI) and machine learning, are making a huge impact in how financial institutions are handling their routine legal work, including managing compliance with contractual obligations arising out of NDAs, vendor contracts, joinder agreements, and other legal contracts. With the right tools, including contract analysis software, financial institutions can better ensure that they’re complying with all contract terms, while reducing errors and inefficiencies.
Nearly every large financial institution is regulated by the SEC, which imposes strict rules about how registered investment advisers or broker-dealers are supposed to conduct themselves. One important factor in whether the SEC may deem an organization to be a good actor is whether or not that organization is abiding by its agreements and complying with its contractual obligations owed to counterparties.
In reviews, audits or exams, the SEC may look more favorably on those financial institutions with a clear view into what terms are in their contracts and agreements, track those obligations, and ensure that they are abiding by them. Contractual obligations span a wide range that includes both affirmative obligations, like active reporting requirements, and negative covenants, such as limitations on types of vehicles in which specific investors are willing to invest. Historically, tracking all these various obligations has been so time-consuming as to be nearly impossible.
At best, most financial institutions have traditionally had a list of their contractual obligations compiled into a stale PDF or Word document that took significant resources to create but does nothing to actively alert a company of its obligations or monitor and track compliance in any proactive way. Instead, hundreds of obligations sit untouched in documents, with little or no way of extracting that data and making it useful for ensuring compliance.
Thankfully, the latest wave of legal technology solutions has made it possible for financial institutions to obtain a much clearer view into their contractual obligations in order to more efficiently and effectively ensure compliance.
AI and machine learning-enabled tools are able to ingest contracts and help identify their binding legal obligations in a fraction of the time it has historically taken humans to do so with manual processes. While we are still in the early days of being able to leverage these tools to fully automate contract-data capture, some legal technology companies already offer solutions that identify and extract key terms from legal contracts and put those terms into a form of usable data that allows organizations to actively track their obligations.
The benefits are many. In addition to reducing the cost and time required to extract the contractual data necessary to ensure compliance, only organizations that know the full extent of their obligations be confident they're actually following through. Coordinating disparate departments with complex procedures also becomes easier, as data and information across an entire institution is captured and organized in one standardized place. This helps to normalize tracking across the organization and ensure institution-wide compliance using accurate, real-time data that creates a complete picture of the entire organization’s compliance activities.
These legal AI-enabled solutions also remove the inefficiencies and delays that plague traditional processes, by simultaneously tracking obligations, activities, and dates in order to visualize compliance from start to finish — what needs to be done, when it needs to be done and the if, when and how of whether it is done. Relying on automation rather than manual processes also allows organizations to better allocate their resources, by dedicating valuable employee time to higher-value work and core business tasks rather than manual legal tasks like monitoring compliance.
Compliance is not simply an inconvenience, but a requirement that has severe consequences if not met, including fines and negative actions by the SEC and other regulatory bodies. Harnessing the power of a leading legal tech solution incorporating legal AI and machine learning can finally give financial institutions a way to know not only what their compliance obligations are, but to be sure they’re meeting them in the most accurate and efficient way possible.
